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from Breakingviews:

Lehman is back! Is the financial crisis over?

By Antony Currie The author is a Reuters Breakingviews columnist. The opinions expressed are his own. If only 42 really was the answer to life, the universe and everything. That’s how many months Lehman Brothers languished in Chapter 11 protection. The Wall Street firm’s failure in September 2008 triggered a global financial meltdown. Sadly, the emergence of its ghost from bankruptcy three-and-a-half years later scarcely offers even symbolic hope that the crisis is truly over.

Lehman’s was neither a typical bankruptcy of the kind seen, say, at American Airlines nor a quickie reboot like the ones the government funded at Chrysler and General Motors. Instead, the firm offloaded its major businesses just days after going under - the asset management unit to its partners, the U.S. brokerage to Barclays, and the European and Asian operations to Nomura.

Since then, Lehman has been a humongous exercise in asset liquidation for debt holders to fight over. Creditors submitted more than $300 billion in claims and will probably recover around $65 billion over time. The process has been a steady source of bounty for lawyers and other advisers, who between them charged the defunct bank’s estate $1.5 billion in fees.

In the meantime, the worst of the crisis, in the United States at least, has become history. But the effects are lingering. Other failures from September 2008 are still struggling. Taxpayers have so far committed $180 billion to keep Fannie Mae and Freddie Mac afloat, with no sign of any meaningful reform. American International Group has at least paid back some of the aid it received, but managed only a 2.3 percent return on equity last year.

A mix of unresolved new regulations, a slow U.S. recovery and Europe’s sovereign debt crisis make profit hard to come by for banks and other insurers, too. It’s also unclear whether the financial system is now any better placed to cope with another Lehman-like collapse, despite the hopes attached to reforms in the United States and elsewhere.

Perhaps most tellingly, Western governments and taxpayers’ funds are now far more enmeshed in keeping financial markets functioning than for decades - and are likely to stay that way for some time. Lehman’s emergence from bankruptcy is a landmark of sorts. But for the future of the financial system, it’s irrelevant.

from Global Investing:

Central banks and the next bubble

Central bank balance sheets are expanding at what some say is an alarming pace. Can this cause the next bubble to form and burst?

JP Morgan estimates G4 (U.S., Japan, euro zone and Britain) balance sheets are now around 24% of GDP combined, with around 11% of GDP comprising bonds held for monetary purposes.

"The recent pace of balance sheet expansion is the fastest since the immediate aftermath of Lehman, largely down to the ECB. The increased BOJ purchases, more QE in the UK, and 200 bln euros upwards of increased ECB lending from this month's LTRO together point to a further $600bln+ rise in G4 central bank balance sheets this year, to around 26% of GDP."

Outside G4, Switzerland is a country which saw a massive expansion in its central bank balance sheet. And because of its huge holdings, its balance sheet has been very volatile.

The Swiss National Bank suffered a loss of 21 bln francs last year -- its biggest ever -- due to currency interventions to weaker the Swiss currency. It expects to swing back to a profit of 13 bln francs this year.

Its acting chairman Thomas Jordan himself admitted: "Our profits have been and will be very volatile … because our balance sheet is four to five times as big as it was five years ago."

from Global Investing:

Euro periphery: Lehman-type shock still on cards

The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.

However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece -- rising debt and weak economic growth pushing the country to seek a bailout -- as a result of tighter financial conditions.

Take this warning from JP Morgan:

Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.

JP Morgan uses analysis based on quantifying the impact of financial market developments and monetary policy actions on economic activity. The main variables the analysis uses is: the three-month LIBOR rate, the yield on investment grade corporate bonds, the spread of high yield corporates over that of high grade, real equity returns, the change in the real exchange rate and bank lending standards for businesses as reported in loan officer surveys.

According to JP Morgan's calculations, the 838 basis-point rise in the peripheral HY spreads implies a drag of -2.2 percent of GDP relative to what it would otherwise have been, had the HY spread unchanged.

from Breakingviews:

Did MF Global clients forget Lehman’s lessons?

By Margaret Doyle The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Have MF Global’s clients suffered an action replay of the collapse of Lehman Brothers? That’s the intriguing question posed by the broker’s demise, which has left executives facing accusations of misusing client funds. One theory is that MF Global was able to use a legal process called rehypothecation to use customers’ money to back its own trades.

When investors enter into a trade with a broker, they typically secure the deal by posting collateral, which is deposited in a ring-fenced account. Rehypothecation is the practice whereby brokers ask clients for the right to use the collateral to back the broker’s own trades or borrowing. In return for allowing their assets to be reused in this way, clients get cheaper funding and services.

In the United States, regulators have limited the practice. Brokers are only allowed to rehypothecate assets worth up to 140 percent of the client’s liability. So if a client has borrowed $100 secured by collateral worth $300, the broker can rehypothecate assets worth up to $140. The remaining $160 of collateral remains untouched. But in the UK there is no limit to rehypothecation, so the broker can use the full $300 as collateral for another trade.

MF Global appears to have taken advantage of this transatlantic difference. According to accounts filed by MF Global in the UK, the broker’s London-based subsidiary had sold or repledged $16.1 billion in customer collateral as of March 31, 2011.

There’s no way of knowing how MF Global used these funds. Jon Corzine, the former New Jersey governor who ran the broker and masterminded its failed $6.3 billion bet on euro zone debt, has denied misusing client funds. KPMG, the administrator for MF Global’s UK arm, says it has no evidence that contractual terms were breached. But as rehypothecation was explicitly permitted in MF’s client agreements, this wouldn’t constitute a misuse.

Nevertheless, the apparent scale of MF Global’s use of rehypothecation is surprising given that many hedge funds were burned by the practice when Lehman collapsed in 2008. Many of the client assets in the Wall Street broker’s UK arm had been rehypothecated, leaving customers to fight for their cash as unsecured creditors.

from Unstructured Finance:

Steven Cohen in his own words

By Matthew Goldstein and Jennifer Ablan

The thing about deposition excerpts—even lengthy ones—is that some of the tantalizing material gets left on the cutting room floor. And that’s certainly the case with hedge fund billionaire Steve Cohen’s two-days worth of  testimony in the long-running Fairfax Financial litigation.

Now don’t get us wrong—there is plenty of great and illuminating stuff in the 242 pages of deposition testimony Reuters obtained through a court motion to unseal documents in the civil lawsuit. As we noted in our story, Cohen is pressed at great length for his views on insider trading—he thinks the laws are “vague”. And as we highlighted in our blog, there’s even an amusing little feud between the lawyers over how the SAC Capital founder should addressed.

Still, it makes you wonder what was said by Cohen in the more than 400 pages of deposition transcript that wasn’t unsealed. And we’d love to see Cohen on videotape as sometimes body language can be revealing.

One of the more intriguing tidbits in the deposition is a very brief line of inquiry by Fairfax’s lawyer about whether Cohen had an early discussions in September 2008 about the Federal Reserve’s plan to backstop the commercial paper market. The Commercial Paper Funding Facility, or CPFF, was one of the most important steps taken by the Federal Reserve to keep liquidity following in the financial system after the collapse of Lehman Brothers.

Indeed, between July 2007  and the failure of Lehman Brothers, the relative use of commercial paper fell 10 percentage points, according to a research paper by the Federal Reserve Bank of Dallas. The Fed’s CPFF program, which was announced in October 2008, “helped prevent commercial paper from imploding by as much as it did in the 1930s,” the paper added.

When asked by Fairfax's lawyer if he or someone on his team was given a heads up on the CPFF, Cohen responds, “I don’t remember that.” He then goes on to say, “I’m not a credit person.” (see page 352 of transcript)

from The Great Debate:

Two years after Lehman, risk of financial collapse is still high

By Mark Williams The opinions expressed are his own.

Events unfolding in Europe -- including Greece, Portugal, Spain, Italy, and most recently Ireland -- are alarming reminders that systemic risk is the most pressing of this decade.

While it’s been two years to this day since the death of Lehman Brothers almost brought down the entire financial system, global systemic risk -- the chance that a single event or series of events can collapse the world financial system – remains quite high.

In response to this threat, international banking regulators just approved higher Basel III capital requirements as a step in reducing global systemic risk. Banks with more capital are being forced to make more room to absorb losses, helping to increase economic stability. Under this tougher standard, banks need to maintain a minimum tier one (core) capital ratio of 4.5 percent, more than double the previous requirement.

As further risk mitigation, dividend and discretionary bonus payments will be restricted unless core capital ratio is 7 percent or higher. Unfortunately the phase-in period for these stronger capital standards is from 2013 to 2019. So this multi-year time gap allows for plenty of systemic risk to persist and grow.

Domestically, the Dodd-Frank Act passed in July also attempts to address systemic risk by setting up a Financial Stability Oversight Counsel (FSOC) made up of major financial firefighters like the Fed, SEC, FDIC, and the Treasury. For the first time, managing systemic risk and its impact on the economy is an official U.S. regulatory policy.

from Breakingviews:

Another Lehman will come — and should fail too

The blind self-belief of financiers can't be abolished. Neither can cycles in the industry. But two years after the disastrous failure of Lehman Brothers, regulatory shifts have the potential to reduce the impact of a repeat. The challenge for politicians and watchdogs is not to go soft.

That's what happened before. A munificent Federal Reserve helped stoke a leverage bubble that masqueraded as "the Great Moderation." Meanwhile, financial regulators of all stripes dozed off, encouraged by lawmakers too cozy with Big Finance.

Then there was the costly bust. The swing of the pendulum from greed to fear has produced useful results. One is an effort to create powers for the orderly closure of a firm like Lehman. Tougher capital standards, imposed by market forces and regulators alike, also make sense. New rules and greater scrutiny for the over-the-counter derivatives market, one source of the interconnectedness that made Lehman's failure so painful over and above its size, were overdue, too.

Yet supervisors didn't use their already existent powers energetically enough to crimp the activities of institutions later deemed too big to fail. For all the Basel III talk of building capital buffers in good times, today's response to the financial crisis -- not to mention what little penitence there is on the part of banks -- looks pro-cyclical.

Only the next Lehman will show whether lessons have been learned. Restructured bank pay mechanisms could make excessive risk slightly less rewarding, but bankers won't stop their boundless quest for riches. If Son of Lehman has more capital and a better match between its assets and liabilities, failure will be less likely. And if financial euthanasia becomes an option as intended, the repercussions won't spread as far.

But authorities must remain vigilant and skeptical, over and above enforcing new rules. After all, in mid-2008, Lehman would have comfortably exceeded new Basel III capital standards.

from Breakingviews:

Fuld may have a point mixed in with his Kool-Aid

Dick Fuld is still hung over from his home-brewed Kool-Aid. The former Lehman Brothers boss hasn't stopped blaming his investment bank's demise on "uncontrollable" market forces, false rumors and the lack of a government rescue. That neglects his own hubris and failure to buttress the firm. But he makes at least one fair point: U.S. regulators were damagingly inconsistent.

The Financial Crisis Inquiry Commission may not learn much new about the well-documented Lehman collapse from this week's hearings. In written testimony on Wednesday, Fuld again argues he and his colleagues did what they could and were still unable to stop a run on Lehman or the dramatic Sunday night bankruptcy filing that ensued. In hindsight, they didn't do enough. But even at the time, the pugnacious Fuld seemed too dismissive of skeptics like hedge fund manager David Einhorn.

Fuld is, however, justified in highlighting the government's inconsistency, which plainly worsened the market reaction to Lehman's failure. He stops short of saying other financial firms with bosses just as blinded by their own hype were given a helping hand rather than cut loose -- but that was the case to differing degrees with American International Group, Bear Stearns, Citigroup, Fannie Mae, Freddie Mac, Goldman Sachs and Morgan Stanley.

Harvey Miller, a Weil, Gotshal & Manges attorney who advised Lehman, rightly notes in his own written FCIC testimony that the authorities' explanations for refusing to rescue Lehman have been unpersuasive. They have mostly relied on strict legalities and small print. But rules were torn up or heavily bent in other situations. The timing of the AIG, Fannie and Freddie bailouts -- all close to Lehman's failure -- and the stock of political capital in each case seems to have had at least as much to do with it.

The FCIC, due to report in December, is in many ways a lame duck. Legislation to overhaul U.S. financial regulation has already passed. Improved systemic monitoring and coordination between regulators is part of that. But there has been inadequate scrutiny of the interactions between administration officials, politicians, regulators and bankers that led to widely different outcomes. The commission could make its mark by figuring out what went awry in those dealings -- and how to avoid it next time.

from DealZone:

Deals wrap: AgBank’s IPO causes frenzy

It's hard to find fault with the second-largest IPO in history, but analysts were only lukewarm about this week's $19.3 billion IPO debut by Agricultural Bank of China.

Despite the tepid debut, AgBank's IPO is only overshadowed by Industrial and Commercial Bank of China's (ICBC) world record $21.9 billion public float in 2006. More interesting than the monetary value attached to its IPO was the fact that AgBank was even able to pull it off in the first place, given the global downturn and a very short three-month completion process. In a Reuters special report, one banker involved in the deal said: "It's the last of its kind."

Apparently cats aren't the only species with nine lives - hedge-fund advisers do too. Bloomberg reported that Neuberger Berman Group LLC, which was part of Lehman Brothers Holdings Inc., has "reassembled a team of executives to invest as much as $1 billion in firms that run hedge funds."

With this week's announcement that Kleiner Perkins Caufield & Byers partner Joe Lacob led the group that was buying the NBA's Golden State Warriors for a record $450 million, PE Hub editor Dan Primack wondered whether Lacob would quit his day job as one of Silicon Valley's most prominent venture capitalists.

from UK News:

Pru’s Asian misadventure: a cautionary tale

By Clara Ferreira-Marques

Prudential's ill-fated Asian adventure has left the company and its management badly bruised. But it has offered at least two valuable lessons for ambitious executives tempted onto the acquisition path by post-crisis, "once-in-a-lifetime" deals.

Lesson one: It's not 2007 any more, Toto.

Lesson two: Disregard shareholders at your peril.

On the first, bold mega-deals that once impressed the market now seem to mostly unsettle both investors and regulators.

Unease at the Financial Services Authority -- and a need to tick every box -- was responsible for the unprecedented and damaging last-minute delay to Pru's offer details last month.

For that, Prudential can thank the financial crisis, but also Royal Bank of Scotland's near-fatal role in the hubristic and record takeover of ABN Amro -- despite shareholder misgivings and clear signs of an impending crisis.